The Securities and Exchange Commission (SEC) has in recent weeks seemingly broadened its pursuit of wrongdoers by filing cases against defendants on the charge of negligence alone. Negligence can be defined as a situation in which one should have known that information given to investors was inadequate. In recent years, negligence fines have been what accused bigwigs would accept and pay to avoid more severe charges of fraud, which carry heavy costs and the potential to be banned from the finance industry. Such admissions were usually made out of court and out the public eye. Readers looking to learn more about the role of negligence in securities law proceedings can visit our firm’s informational Practice Areas and Investors sections.

Criticism of the SEC’s post-2008 methods has come in part because they have seemingly failed to catch many financial criminals in the act. Detractors believe that in many cases, outright fraud or recklessness is the issue: branding such failures as negligence would then only diminish or downplay their severity. The penalties for fraud are far more severe, but are in turn more challenging to obtain, as they require proof of intentional malfeasance. The charge of “Recklessness” falls between fraud and negligence in severity, and can be defined as one turning a blind eye to potentially harmful activity.

Concern from SEC’s critics stems from the idea that the commission will be too easily satisfied with issuing negligence as a kind of “slap on the wrist”, and that it is too often favored over more intensive measures that require greater time, money, and research. In 2010, Citigroup paid $180,000 in fines that kept them from facing SEC civil charges for alleged failure to disclose $40 billion worth of dicey mortgage assets.

The most noteworthy instance of SEC proactivity to date has been a civil lawsuit filed against Edward Steffelin, an executive who managed the assets of Squared, a series of J.P Morgan backed mortgage bonds that went under in 2007. Steffelin is accused of failing to inform investors that J.P. Morgan had placed a hedge fund bet that the deal would fail, despite being on paper the group trying to make it succeed. J.P. Morgan, while refusing to admit or deny culpability, paid the SEC $153.6 million to settle civil fraud charges. Says Steffelin’s lawyer Alex Lipman, “We understand the SEC’s desire to burnish its reputation in light of recent scandals… But this is not the right case and certainly the wrong defendant to target as a means to redress these failures.”

Credit rating firms like Standard & Poor, Moody’s, and Fitch Ratings have also been under higher scrutiny from the SEC after the commission found errors in S&P’s analysis of over a thousand mortgage-backed bonds. Like J.P. Morgan and other investment firms, these rating groups have also struggled with public image in the wake of the financial crisis. The SEC’s findings were part of an annual review of such rating firms instated by the Dodd-Frank Act. SEC has furthermore notified Standard and Poor that it may be face charges of fraud for inappropriately rating a $1.6 billion mortgage deal that collapsed shortly thereafter.

It seems possible that some of this heightened monitoring of S&P is a result of a the rating group’s recent downgrading of U.S. debt, an action that has made them no friends on Capitol Hill. The SEC is additionally looking into potential insider trading from S&P employees that may have occurred just prior to the downgrade, and the potential for S&P ratings to be leaked to the companies in question prior to their publication.

The formation of such watchdog committees is but the first step towards resonant progress in financial regulation. Ribbon cutting ceremonies make headlines, but on their own garner no convictions. If the goal is increased expectations of transparency toward the consumer, we can only hope that charges of negligence will deter those who seek to defraud us. How the SEC’s role in reform evolves in the months and years to come will tell us much about what a bailed out financial sector can offer its post-crisis nation, and whether decreases in fraud have been hard fought and achieved.